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looking for commercial financing


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#1 big joe

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Posted 14 September 2004 - 12:40 PM

This is my first time posting, great site!

Here are my numbers in a nutshell: I'm wondering if I'm nuts to think I might be able to get financing without taking on a partner.

I make about $175K year, own a 2 family property ($700k value, $200k total debt). I have about $75k liquid in addition to the equity in my 2fam. I live in one unit and collect $1250 from the other unit.

I am looking at 60 unit, 4 store building with $605k income, $270k expenses, and a FIRST mortgage of $2,700,000 (5.5% 5yr term, 30yr payout--- $184k/year P&I). The seller is looking for $900k cash.

Would the $150K+ net cash flow, plus my excellent credit, plus my equity help me to get to get a second mortgage? If so, what would be the best way to go about it?

Thanks!!!

#2 loanuniverse

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Posted 14 September 2004 - 01:51 PM

Here is my feedback Big Joe:

”… own a 2 family property ($700k value, $200k total debt). I have about $75k liquid in addition to the equity in my 2fam…”
Assuming that you could tap the equity of that property until you have a combined loan-to-value of 80%, this means you could get an additional $360M, which combined with the $75M you have total $435M available for down payment.

” I am looking at 60 unit, 4 store building with $605k income, $270k expenses, and a FIRST mortgage of $2,700,000 The seller is looking for $900k cash.”
Assuming revenue and expenses are adequately represented {normally at this stage, revenue might be a bit inflated and expenses are understated}, you have a NOI of $335M, which results in an estimated valuation of $3,722M using a 9% cap rate. This seems in line with the amount the seller asking for $3,600M.

Take into consideration that the overall rate can increase depending on your market and that you are probably looking at 100% occupancy revenue there. You might want to go over those numbers with detail, and request copies of leases / tax returns.

” FIRST mortgage of $2,700,000 (5.5% 5yr term, 30yr payout--- $184k/year P&I)”
Is this assumable? Chances are that you could not even do a wrap around as most mortgages have clauses that prohibit this.

” Would the $150K+ net cash flow, plus my excellent credit, plus my equity help me to get to get a second mortgage? If so, what would be the best way to go about it?”
Well, you have $435M for this transaction, which means that you actually have $400M since you are probably going to spend at least $35M in closing costs. This leaves you with a financing need of $3,200M.

Getting a first mortgage loan for 75% and even 80% loan-to-value should not be much of a problem. This leaves you $320M {assuming best case scenario of 80% financing}. I seriously doubt that this first mortgage is assumable. In the last eight years analyzing commercial loan requests, I only remember two occasions where we let the buyer assume existing loans.

Commercial Banks would not mind doing the first mortgage, but I don’t think many will be interested in the second position.

You will get non-bank lenders interested, but I would try to keep them just as junior lenders. Even if you have to pay 10% on the 2nd, it will be cheaper than having to pay 7% or higher on the whole amount.

Is there no chance of getting the seller to keep a $360M second mortgage?

Is there no chance of getting additional investors or partners?

The cash flow is nice and the valuation seems ok, but remember that a simple reduction in rental income of 5% takes revenue down to $575M, which results in NOI of $305M and a valuation of $3,388M using a 9% cap rate.

From what I have read so far, the deal could be done, but you need a junior lender or a partner involved in the mix.

Good luck

#3 big joe

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Posted 14 September 2004 - 05:02 PM

QUOTE(loanuniverse @ Sep 14 2004, 01:51 PM)
Here is my feedback Big Joe:

”… own a 2 family property ($700k value, $200k total debt). I have about $75k liquid in addition to the equity in my 2fam…”
Assuming that you could tap the equity of that property until you have a combined loan-to-value of 80%, this means you could get an additional $360M, which combined with the $75M you have total $435M available for down payment.

” I am looking at 60 unit, 4 store building with $605k income, $270k expenses, and a FIRST mortgage of $2,700,000 The seller is looking for $900k cash.”
Assuming revenue and expenses are adequately represented {normally at this stage, revenue might be a bit inflated and expenses are understated}, you have a NOI of $335M, which results in an estimated valuation of $3,722M using a 9% cap rate. This seems in line with the amount the seller asking for $3,600M.

Take into consideration that the overall rate can increase depending on your market and that you are probably looking at 100% occupancy revenue there. You might want to go over those numbers with detail, and request copies of leases / tax returns.

” FIRST mortgage of $2,700,000 (5.5% 5yr term, 30yr payout--- $184k/year P&I)”
Is this assumable?  Chances are that you could not even do a wrap around as most mortgages have clauses that prohibit this.

” Would the $150K+ net cash flow, plus my excellent credit, plus my equity help me to get to get a second mortgage? If so, what would be the best way to go about it?”
Well, you have $435M for this transaction, which means that you actually have $400M since you are probably going to spend at least $35M in closing costs. This leaves you with a financing need of $3,200M.

Getting a first mortgage loan for 75% and even 80% loan-to-value should not be much of a problem. This leaves you $320M {assuming best case scenario of 80% financing}. I seriously doubt that this first mortgage is assumable. In the last eight years analyzing commercial loan requests, I only remember two occasions where we let the buyer assume existing loans.

Commercial Banks would not mind doing the first mortgage, but I don’t think many will be interested in the second position.

You will get non-bank lenders interested, but I would try to keep them just as junior lenders. Even if you have to pay 10% on the 2nd, it will be cheaper than having to pay 7% or higher on the whole amount.

Is there no chance of getting the seller to keep a $360M second mortgage?

Is there no chance of getting additional investors or partners?

The cash flow is nice and the valuation seems ok, but remember that a simple reduction in rental income of 5% takes revenue down to $575M, which results in NOI of $305M and a valuation of $3,388M using a 9% cap rate.

From what I have read so far, the deal could be done, but you need a junior lender or a partner involved in the mix.

Good luck

Thanks for the response.

I have gotten the revenue and expenses from the management company who I believe to be fairly objective at this point, but I will certainly do my due diligence before accepting these numbers as gospel.

I am told the First mortgage is very definitely assumable, but will confirm also.

I am sure I can tap my equity and pretty sure I can get a partner, but was trying to be greedy and do the whole thing myself.

Question, even if the occupancy falls by 5 or even 10%, if I'm mainly interested in keeping this property very long term (mainly for my kids' college), can I not be NOT TOO concerned with the fall in valuation?

#4 loanuniverse

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Posted 14 September 2004 - 08:29 PM

” Question, even if the occupancy falls by 5 or even 10%, if I'm mainly interested in keeping this property very long term (mainly for my kids' college), can I not be NOT TOO concerned with the fall in valuation?”

Geeez Joe, U would certainly be concerned about the present value.

First, this is money going out of your pocket right now. The whole basis of finance is to play around with something called “time value of money” to get future cash back to the present. That sentence almost sounded like a movie title smile.gif

Second, the valuation will determine how much a lender is willing to lend. There is maxim in lending We use the lower of purchase price or appraised value

Finally, if the property is overpriced, this means that you could actually go ahead and put the same money in another property that should give a better relative return. Therefore, your kids not only get to go to college, but you get to retire early.

Good luck.

#5 big joe

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Posted 15 September 2004 - 03:04 PM

QUOTE(loanuniverse @ Sep 14 2004, 08:29 PM)
” Question, even if the occupancy falls by 5 or even 10%, if I'm mainly interested in keeping this property very long term (mainly for my kids' college), can I not be NOT TOO concerned with the fall in valuation?”

Geeez Joe, U would certainly be concerned about the present value.

First, this is money going out of your pocket right now. The whole basis of finance is to play around with something called “time value of money” to get future cash back to the present. That sentence almost sounded like a movie title smile.gif

Second, the valuation will determine how much a lender is willing to lend. There is maxim in lending We use the lower of purchase price or appraised value

Finally, if the property is overpriced, this means that you could actually go ahead and put the same money in another property that should give a better relative return. Therefore, your kids not only get to go to college, but you get to retire early.

Good luck.

I should have been clearer because I am well aware of the time value and present value of money.

In this case, only $900k is going out of my pocket right now- the balance is the assumable (we hope) mortgage. Using these numbers I would be getting a 16-17% cash on cash return. I have been looking around and there aren't too many cases where I can do much better than that right now. My bottom line is there is (ideally) $150k net income per year, or (less ideally) $100k income if I could borrow the $900k at a good rate. If there are better deals out there, I'm having no luck finding them.

Thanks, and if I'm wrong, please tell me so- that's why I'm posting here.

BTW, thanks for running this great site, its just what someone like me needs.

#6 loanuniverse

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Posted 15 September 2004 - 03:22 PM

There are a couple of key matters here.

First, the existing first mortgage being assumable is key. If NOI is overstated this will trickle down to valuation using the income approach. This would mean that you will find it difficult to get a lender to lend you the $2,700M.

Second, you have to recognize that ”… even if the occupancy falls by 5 or even 10%…” not only affects the valuation, but also affects the cash flow and ROI. A 10% decrease in rental income even if you assume the existing mortgage and keep expenses at the same level will leave you with cash after debt service of $90.5M. If you include closing costs on top of the $900M down payment, you probably will not break 10% return.

#7 Commercial Lender

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Posted 18 September 2004 - 03:57 PM

Admin raised a very important issue.

No commercial lender, including us and even a hardmoney lender would ever settle for a 2nd lien position. Not to mention the assumability of the first mortgage. If a lock has expired, you may want to seek the financing of the whole thing or take on a partner with a heavy equity stake in exchange for 900K.

#8 Guest_Yvonne_*

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Posted 27 September 2004 - 04:17 AM

Financial professionals must register. Please read rules.

Edited by loanuniverse, 27 September 2004 - 07:32 AM.






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